A serviced office or coworking agreement contains a lease under FRS 102 only if it gives the customer the right to control the use of an identified space for a period of time. A hot desk membership rarely does, because the provider decides where people sit. A dedicated, physically separate office for a fixed term often does, unless the provider has a substantive right to move the customer, and even then a rolling agreement that either side can end at short notice will usually fall within the short term exemption.
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Why does a serviced office agreement need assessing at all?
The Periodic Review 2024 amendments to FRS 102 apply to accounting periods beginning on or after 1 January 2026 (paragraph 1.37(b)). Under the revised Section 20, a lessee recognises a right of use asset and a lease liability at the commencement date (paragraph 20.45) unless it uses one of the recognition exemptions in paragraph 20.5. Whether the agreement contains a lease now decides whether it goes on the balance sheet.
Serviced office providers usually call their contracts licences or membership agreements, not leases, and they often say expressly that no tenancy is created. That does not settle the accounting. Paragraph 20.15 applies to any contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration, and paragraph 10.4 requires accounting policies that reflect the economic substance of transactions rather than merely their legal form. The general test is covered in our page on how to tell if a contract contains a lease; this page applies it to flexible workspace.
Is a hot desk or coworking membership a lease?
Usually not. A lease needs an identified asset. Paragraph 20.19 says an asset may be specified explicitly in the contract or implicitly when it is made available for use. A membership that lets staff use any free desk in a shared floor does neither: no particular desk is ever made available to the customer for the period.
Paragraph 20.22 points the same way. A portion of an asset that is physically distinct, such as a floor of a building, can be an identified asset. A portion that is not physically distinct cannot be, unless it represents substantially all of the capacity of the asset. A right to a share of the seats in a lounge used by many members is a capacity portion of that kind, so there is no identified asset and the membership fee is an expense for services.
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When is a dedicated office an identified asset?
A private office with a door, a room number in the agreement and keys or access cards issued only to the customer’s staff is physically distinct and is specified, either in the contract or when the customer moves in. That satisfies paragraphs 20.19 and 20.22 unless the provider’s substitution right removes it.
A named desk in a shared open plan room is a borderline case that turns on the substitution and control tests below.
How do relocation and substitution clauses change the answer?
Most serviced office agreements let the provider move the customer to another office. Paragraph 20.20 says that even if an asset is specified, there is no identified asset if the supplier has a substantive right to substitute it throughout the period of use. The right is substantive only if the supplier both:
- has the practical ability to substitute alternative assets throughout the period of use; and
- would benefit economically from doing so.
Both limbs must be met. A centre with many identical rooms, where the provider can move a client at any time at its own cost and gains by consolidating occupancy to free larger suites, may satisfy both. A clause that only lets the provider move the customer with the customer’s agreement, or only to a room of the same size in the same building after consultation, is weaker. A right that arises only in particular circumstances, such as major works, does not give the provider the ability to substitute throughout the period of use, which is what paragraph 20.20(a) asks for.
Paragraph 20.21 adds two rules that often decide the point. The evaluation is based on facts and circumstances at the inception date, ignoring future events that are not considered likely to occur. And if the customer cannot readily determine whether the supplier has a substantive substitution right, the customer must presume that it does not. A customer that cannot see the provider’s occupancy data or economics will often have to treat the room as an identified asset.
Does the customer control the use of the room?
Paragraph 20.16 requires the customer to have, throughout the period of use, both the right to direct the use of the identified asset and the right to obtain substantially all the economic benefits from that use.
For a private office, the customer normally decides who works in it, when within the building’s opening hours, and for what business purpose, which is the right to direct how and for what purpose the asset is used under paragraph 20.25(a). House rules on security or opening hours do not usually defeat this, because paragraph 20.24 says the economic benefits are assessed within the defined scope of the customer’s right to use the asset. If the provider can put other clients into the room or decide its use, control is absent.
How long is the lease term on a rolling agreement?
Even where there is a lease, the term may be short. Under paragraph 20.38 the lease term is the non cancellable period plus periods covered by extension options the lessee is reasonably certain to exercise and termination options it is reasonably certain not to exercise. Paragraph 20.39 says a lease is no longer enforceable when the lessee and the lessor each have the right to terminate without permission from the other with no more than an insignificant penalty. A monthly rolling agreement that either party can end on one month’s notice therefore has a very short enforceable period.
The glossary defines a short term lease as one that, at the commencement date, has a lease term of 12 months or less, and says a lease containing a purchase option is not a short term lease. The exemption is elected by class of underlying asset (paragraph 20.7), and the payments are then expensed on a straight line or other systematic basis (paragraph 20.6). Paragraph 20.8 treats a lease modification or a change in the lease term as a new lease, so a short term agreement that is renegotiated into a two year commitment must be reassessed. The short term and low value exemptions are explained in more detail separately, and judging renewal options is covered under break clauses and options.
How are the services in the fee dealt with?
A serviced office fee usually covers the room plus cleaning, reception, broadband, utilities and furniture. Paragraph 20.28 requires each lease component to be accounted for separately from non lease components unless the practical expedient applies. A lessee allocates the consideration on the basis of the relative stand alone price of the lease component and the aggregate stand alone price of the non lease components (paragraph 20.31), using the price the lessor or a similar supplier would charge separately, or an estimate that maximises observable information (paragraph 20.32). Non lease components are then accounted for under other sections of the standard (paragraph 20.34), which for services normally means an expense as they are received.
Paragraph 20.33 allows a lessee to elect, by class of underlying asset, not to separate them and to treat the whole fee as a single lease component. That is simpler but puts a larger liability on the balance sheet. The discount rate used for the liability is covered in our page on the lease liability discount rate.
How does this work in practice?
Illustration only. A company signs two agreements with the same provider.
| Agreement | Key terms | Outcome |
|---|---|---|
| Coworking membership, £400 a month | Any free desk on the shared floor; cancellable on one month’s notice | No identified asset; expense as incurred |
| Office 12, £3,000 a month for 24 months | Named private room for six; provider may relocate only with the customer’s consent; fee covers room, furniture, cleaning and broadband | Identified asset and control; term over 12 months, so a lease is recognised |
For Office 12, suppose the provider’s own price list shows the room alone at £2,400 a month and the services at £600 a month. Without the practical expedient, the lease payments used to measure the liability are £2,400 a month for 24 months, discounted, and £600 a month is expensed as services. Had Office 12 been on a three month rolling basis, the company could expense the whole fee if it has elected the short term exemption for that class of asset.
What mistakes come up most often?
- Treating the word licence as conclusive. Section 20 looks at rights, not labels.
- Assuming any relocation clause defeats a lease. It must be practical and economically beneficial to the provider throughout the period, judged at inception.
- Using the notice period alone. Fixed minimum terms, penalties for early exit and options the company is reasonably certain to exercise all feed into the lease term.
- Capitalising the full fee without deciding whether to apply the paragraph 20.33 expedient as a policy for the class.
- Missing agreements that existed when the company first applied the new rules; transition is covered in our page on the 2026 lease transition.
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Related Accountapedia entries
- Rent to buy and lease option agreements: tax
- Serviced accommodation and Airbnb: how it is taxed
- Shareholders’ agreements
- Payments for loss of office to directors
- LLP members’ agreements
Sources
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.